Alimony payments are about to undergo a radical change from a taxation perspective as a result of the Tax Cuts and Jobs Act (TCJA). Currently, alimony payments to an ex-spouse can be written off come tax season. However, these deductions will soon become a thing of the past. The new tax reform law goes into effect on January 1, 2019. Divorces finalized before the end of 2018 are not affected by this modification. For divorces finalized in the new year, one major change is that alimony payments will no longer be deductible.
Defining Alimony Legally
These write-offs are an important factor for payors that have substantial payments to make. If you are already paying or receiving alimony, it is important to know what makes it tax deductible. Payments are required to follow a tax-law definition of alimony – otherwise, they are classified as payments to divide the marital property or child support and are a nondeductible personal expense.
The current tax-law definition of alimony states that payments must:
- be written in the divorce decree or other document,
- be made to or on behalf of the ex-spouse,
- must be cash or equivalent,
- not be treated as child support or a property settlement,
- not continue in the event of the recipient’s death unless stated otherwise.
A Bargaining Chip
If you are the payor, it is to your advantage to finalize the divorce before the end of 2018, but if that’s just not possible, you may not be completely out of luck. There’s good news for the person receiving alimony payments because payments will no longer be considered taxable income. This could become a point of negotiation when determining alimony payments during the divorce process, as the payor can point out that the recipient will ultimately retain more of the alimony payments than if it were subject to income tax.
More About How TCJA Impacts Families
There’s much more to the TCJA than a change in the taxable status of alimony, including a change in the dependency exemption for children, higher taxes for couples filing jointly, and changes in the tax-advantaged plans for education. Check out this article from the CPA Journal for more information about this new legislation going into effect in the new year and how it will affect families across the U.S.